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Mark Carney’s ‘shock’ appointment means more of the same

November 27th, 2012

(Photo Source: the Telegraph)

In response to yesterday’s news of Mark Carney being appointed the new governor of the Bank of England, I wrote the following piece for the Guardian’s Comment is Free section, published on November 26. I argue that George Osborne’s choice for governor of the Bank of England will do nothing to prevent the next collapse of the financial system. The original article can be read here.

Today the chancellor confirmed that there will be no real change at the Bank of England. There will be no change to the Treasury and Bank of England’s obsession with inflation targeting and “price stability”. Above all, he confirmed that there will be no reining-in of the banks; that banks will not be re-structured – to separate the retail and investment arms, and ensure that banks are no longer too big to fail.

The FT was right when in January this year it described Carney as [FT paywall]“the leading example of a new breed of ambitious, internationally focused central bankers who view regulatory and monetary policy issues through a more market-based lens”. He favours an “open and resilient financial system” – code for giving the banks free rein in global capital markets. And like many of his peers he believes that the key to recovery lies in all western economies “capitalising on the immense opportunity that emerging markets in general and China in particular represent”. Like others, he prefers exports over the expansion and strengthening of domestic markets.

So be very afraid. Business-as-usual will prevail. And nothing will be done to constrain the City, and therefore to prevent the next collapse of the financial system.

Carney is a central banker steeped in the culture and practices of Goldman Sachs’s investment banking arm. Before becoming Canada’s central bank governor, he spent 13 years with Goldman Sachs in its London, Tokyo, New York and Toronto offices. He held a range of senior positions. The most significant was as managing director of investment banking.

In a speech made recently Carney made the right noises. He complained of “a system that privatises gains and socialises losses” and endorsed the approach that sets capital and leverage ratios for banks. He’s even commended the Occupy movement for being “constructive”.

But there is nothing in his speeches that indicates that he will help give Britain’s real economy the protection it needs from its over-mighty – and still very dangerous – banking sector. Nothing, in other words, that indicates the real economy – the productive sector – will be given priority over the City’s preference for reckless global speculation.

Instead like many others who adopt a “market-based” approach to regulation, Carney prefers to tinker – retrospectively – with the capital ratios of banks. This is because he and many others in central bank circles know that most of the Britain’s banks are very highly leveraged. That without the support of the Bank of England’s quantitative easing programme, and its very low lending rates – all effectively backed by British taxpayers – Britain’s banks would effectively be insolvent.

And so Carney will continue with quantitative easing – which has provided British banks with the liquidity needed to indulge in speculative activity both at home and abroad, speculative activity that bears a scary resemblance to that undertaken before the crisis.

He is unlikely to pressure his friends in the City’s commercial banks to lend at low sustainable rates to Britain’s productive sector. He is therefore most unlikely to reverse the most bizarre and historically unprecedented aspect of today’s British banking system: the fact that those of us in the real economy are lending to banks. Their original mission – of lending into the real economy – has been turned on its head. Today Britain’s banks are recipients of loans (deposits) from those active in the real economy – and subsidies from taxpayers.

3 comments to Mark Carney’s ‘shock’ appointment means more of the same

Great piece. Horrible comments thread, as ever on CiF. Remarkable how few commenters (pro or con) show any sign of understanding what your actual argument is, and engaging with it, for or against.
A genuine question: say the establishment gets lucky and its preferred strategy of making the financial sector an even greater proportion of the British economy (“capitalising on the immense opportunity that emerging markets in general and China in particular represent”) actually goes quite well in the first instance, how long do you think it might look like it is working, before the next financial crash happens? And is it your view that the next collapse is the final collapse, the one we can’t bail out?

“And so Carney will continue with quantitative easing – which has provided British banks with the liquidity needed to indulge in speculative activity both at home and abroad, speculative activity that bears a scary resemblance to that undertaken before the crisis.”

Do you know where there is information on “speculative activity both at home and abroad”?

Between his time as a Goldman banker and his appointment as Governor of the Bank of Canada, Mark Carney served in Canada ‘s Department of Finance. He was responsible for the “income trust” file. Think of income trusts as the equivalent of a profit sharing investment vehicle that was popular with Canadians seeking retirement income. Income trusts, were however, not popular with the CEOs of Canada’s large corporations, since income trusts placed corporate governance in the hands of investors (as opposed to CEOs) and served to lessen the abusive compensation earned by CEOs.

This friction between investors and CEOs came to a head in 2006 and CEOs lobbied the Canadian government to shut this form of investment vehicle down (against the interests of their shareholders). Under Mark Carney’s directive, the government sided with the CEOs. To bring about the CEOs desire to kill income trusts, Mark Carney resorted to the completely false (and hence fraudulent) argument that income trusts were causing the government to lose tax revenue (when income trusts actually enhance the gov’t’s tax collection).

This is where Mark Carney proved himself to be morally bankrupt, because the policy that he championed caused 2.5 million Canadians to lose $35 billion (yes, billion) of their hard earned life savings, when the government announced a double taxation of income trusts.

Mark Carney’s policy was premised on a total falsehood (alleged tax leakage) and caused a major loss to investors, hence Mark’s actions constitute a the textbook definition of fraud.